CASE SUDY

Read the following case studies:

  1. “Continental”
  2. Starwood Hotels and Resorts
  3. “Jet Blue”

Choose one to provide an analysis of the case to include:

  1. Overview of the company
  2. Overview of the problems the company faced
  3. List of the key players in the case
  4. Solutions to the problems the company faced
  5. Your personal assessment of the situation and three strategies you would have used to approach the problems differently.
  6. Assess the performance of the company since the case study was written

ABSOLUTELY NO PLAGIARISM, PAPER MUST MAKE SENSE, NO GRAMMATICAL ERRORS. MINIMUM 900 WORDS WITH AT LEAST 3 SCHOLARLY/PEER REVIEWEDAPA REFERENCES. MUST INCLUDE A PROPER INTRODUCTION AND A WELL CONSTRUCTED CONCLUSION. DUE JANUARY 12, 2018 AT 11AM NY EST TIME. 

Written by Christian Boyens, Ji-Young Cha, Ronit Livneh, Felicia Pan-Fea, Vishal Singh and Pierre- Edouard Vintrou under the direction of Jeffrey S. Harrison at the School of Hotel Administration, Cornell University. Copyright c Jeffrey S. Harrison. This case study was written for the purposes of classroom discussion. It is not to be duplicated or cited in any form without the copyright holder’s express permission. For permission to reproduce or cite this case, contact Jeffrey S. Harrison (harrison@richmond.edu). Permission to use in the classroom will be granted free of charge.

The Center for Hospitality Research

AT CORNELL UNIVERSITY

JetBlue: Flying for Success

“Imagine how you would create an airline if you

were building it from scratch. No ridiculous promises of ‘self-actualization’ onboard, no exorbitant airfares, no cattle-train mentality, no hassles.”

— www.jetblue.com – Definition of company culture JetBlue Airways (JetBlue) is the new discount airfare business model for the

airline industry to follow. A young company of 4 years has been able to stand strong even after the tragic events of September 11th. As the industry struggles to return to stability, JetBlue has been able to overcome the challenges and double their revenue. JetBlue’s strengths can be pinpointed to executive management’s experience within the airline industry as well as JetBlue’s ability to differentiate itself from the competition. Some of its most important strategies are limiting operating costs, flying with a new airbus A320 Fleet, developing a quality brand, hiring dedicated employees, and pursuing the latest technology. To expand more quickly, JetBlue has decided not to pay any dividends to their stockholders, but rather use their earnings to continue further growth of the company.

HISTORY JetBlue is an airline with a very brief but interesting five-year history. During

February 1999, David Neeleman announced his plan to start a new discount airline. He wanted to offer “a low-fare, low-cost passenger airline that provide[d] high quality

JetBlue: Flying for Success, 2

customer service”.1 Neeleman was not new to the industry; he was actually a cofounder of Morris Air, one of the first airlines to offer ticketless travel.2 After selling Morris Air to Southwest Airlines, Neeleman designed a reservation system, “Open Sky”, that “integrated electronic ticketing, Internet booking and revenue management tools and generated timely operational and financial reports”3. After he sold his new reservation system to Hewlett-Packard, Neeleman was ready to launch his new company, “JetBlue”.

The airline was originally introduced as “New Air” but later changed its name to

“JetBlue”. “’JetBlue’ mean[s] a true, deep, and absolute blue”4. The basic strategy of the new airline was to offer discount airfares that “provided high-quality customer service”5 on point-to-point routes. All of the flights were designed with the comfort of customers in mind. Planes were equipped with 162 leather seats with a personalized satellite TV that had access to 24 channels of Direct TV at each seat. The flights mostly serviced small markets and major metropolitan areas. The company started with the initial investment of $130 million, which was the largest capitalization venture in the history of airline start-ups.6 Neeleman wanted to build an organization where the employees took pride in their company, and achieved this by instilling JetBlue employees with the company’s five core values—safety, caring, integrity, fun and passion. This has helped the employees focus on the strategy of the company.7

A year after the conception of Neeleman’s idea, a base headquarter was

established at New York’s John F. Kennedy International Airport. JetBlue’s debut was originally estimated to open at a stock price ranging from “$22 to $24 per share for 5.5 million shares, but [the] airline’s shares opened at $37.52. The stock traded as high as $46.24 before closing at $45.”8

JetBlue’s inaugural flight was between JFK and Fort Lauderdale. Within the first

six months, JetBlue was able to expand their services to Buffalo (NY), Tampa (FL), Orlando (FL), Ontario (CA), Rochester (NY), and Oakland (CA).9 As revenue increased, the company was able to continue expansion to several more cities including Burlington (VT) and West Palm Beach (FL). Within a year, JetBlue served its one millionth passenger. In its first year alone, JetBlue had a net income of $38.5 million.10

On March 20, 2001, JetBlue was ranked by Zagat as the second best airline

“overall”, “comfort” and “service”11. During that month, JetBlue serviced its’ two

1 http://www.ipo.com/ipoinfo/profile.asp?p=FINA&eid=6606&page=company, November 20, 2002. 2 http://www.cio.com/archive/070102/jetblue_content.html, November 18, 2002. 3 http://www.cio.com/archive/070102/jetblue_content.html, November 18, 2002. 4 http://www.epinions.com/content_71628852868, November 18, 2002. 5 “Prospectus: JetBlue Airways Common Stock,” 11 April 2002. 6 http://www.planebusiness.com/tscolumns/tscolumns/ts012501.html, November 20, 2002. 7 http://www.hratworkco.com/July2002.htm, November 19, 2002. 8 http://www.flagventure.com/portco_news.asp, November 18, 2002. 9 http://www.jetblue.com/learnmore/timeline.html, November 18, 2002. 10 http://www.kbcc.cuny.edu/UCVE/JetBlue%20Case.pdf, November 20, 2002. 11 http://www.jetblue.com/learnmore/timeline.html, November 18, 2002.

JetBlue: Flying for Success, 3

millionth passenger. As of February 28, 2002, the airline operated “108 flights per day, including 52 daily flights between JFK and Florida, 26 Daily flights between JFK and upstate New York and 18 daily flights between JFK and the western United States”12.

After the tragic events of September 11th, 2002 (9/11) JetBlue remained strong

and fiscally sound. Even though there was a drastic decrease in occupancy for months after the event, JetBlue “did not lay-off or furlough any employees nor did [it] defer any aircraft”.13 Instead, it was one of the first airlines to install bullet proof and force resistant cockpit doors across their fleet. It also took the initiative of installing AD video cameras in its fleet by March 2002.14 While still recovering from the hit of 9/11, JetBlue made their initial public offering (IPO) on April 12, 2002.15

On June 18, 2002, JetBlue introduced “TrueBlue”, the first loyalty program for

low-fare carriers. The program was designed for customers to collect “points” instead of “miles” every time they chose JetBlue over other airlines. Within a month of introducing “TrueBlue”, over 94,000 people signed up for the program16. Each trip was designated a certain number of points. After the customer received 100 points, the customer was given a free roundtrip ticket.17

On October 24, 2002, the Board of Directors announced that they had planned a

three-for-two stock split. The actual split will occur on December 12, 2002. After the stock split, there will be 63 million shares of outstanding shares of common stock.18 At the same time, the company initiated a stock purchase plan for their crewmembers.19

Even with a short history, the company has proven its success to be

incomparable to any other airline company. The company has continued to expand in recent months to Syracuse (NY), Long Beach (CA), New Orleans (LA), Denver (CO), San Juan (PR), Seattle (WA), Las Vegas (NV) and Washington (DC). The company plans to add an additional 18 daily flights, increasing operations to 102 daily flights and 20 destinations by the end of the year.20

12 “Prospectus: JetBlue Airways Common Stock,” 11 April 2002. 13 http://media.corporate-ir.net/media_files/nsd/jblu/custom/transcript.htm, November 20, 2002. 14 http://www.ad-aero.com/latest/newsrel/jetblue/, November 20, 2002. 15 http://biz.yahoo.com/p/j/jblu.html, November 19, 2002. 16 http://media.corporate-ir.net/media_files/nsd/jblu/custom/transcript.htm, November 20, 2002. 17 http://www.jetblue.com/learnmore/pressDetail.asp?newsId=130, November 19, 2002. 18 http://news.cnet.com/investor/news/newsitem/0-9900-1028-20575971-0.html, November 18, 2002. 19 http://media.corporate-ir.net/media_files/nsd/jblu/custom/transcript.htm, November 20, 2002. 20 http://news.airwise.com/stories/2001/11/1005138308.html, November 20, 2002.

JetBlue: Flying for Success, 4

ENVIRONMENTAL ANALYSIS The Broad Environment. This section serves to discuss the various factors in the broad environment

affecting the airline industry. Socio/cultural, economic, political, and technological factors are all influential to the airline industry. It is important to acknowledge that as every factor interacts with and influences the other, the boundaries between these factors can get blurred. Therefore, certain factors which are included in one category may apply to another.

Socio/cultural Influences Globalization. The airline industry lags behind other industries in carrying out

globalization. Although deregulation in 1978 released the airline market to open competition and liberalization, some regulatory movements hinder the airlines from owning “sufficient scale to dominate their surrounding markets and [volumes] to lower unit costs.” 21 This is exemplified by the U.S. Justice Department’s denial of the merger between United Airlines and US Airways fearing the creation of a monopoly.

In many respects, globalization is an inevitable and necessary step for airlines

which are struggling to simply stay in business and out of bankruptcy. Globalization will enable airlines to achieve economies of scope and scale, seamless service, and lower costs and prices by exposing them to the broader market and to a bigger customer base. However, the industry must answer the following question before it can take any steps forward: Will the airlines overcome “regulatory-imposed limits” and successfully join in the globalization trend?22

Mergers. Since deregulation, the airline industry has to experience a great deal

of turbulence in its economic performance. Competition has become more sever with the financial performance extremely uneven. Thus, a new trend toward mergers between airlines has surfaced in the industry. There exists two opposing views on the issue of airline mergers. . Some argue that the drive for scope and scale is the best option to revive the depressed airline industry. Increasing scope and scale, meaning creating larger companies, will allow airlines to increase their levels of such intangibles as knowledge, management systems and brand, and such tangibles as aircraft and communication systems.23 In response to the view that the mergers will cause a significant decrease in competition, merger advocates assert that mergers will, in fact, create more competitors. According to the magazine Airline Business, “the top 25 groups control close to 70% of world revenue and the top half dozen are bigger than the entire industries of regions like Africa or even South America.”24 So, it is not surprising 21 Kevin O’Toole, “Lost by line,” Airline Business 1 March, 2002. 22 Daniel Yergin, et al., “Fettered Flight: Globalization and the airline industry,” Global Decision Group 10 Oct. 2000: 3. 23 Daniel Yergin, et al., “Fettered Flight: Globalization and the airline industry,” Global Decision Group 10 Oct. 2000:

3. 24 Chris Thornton, “Who’s afraid of mergers?” Airline Business September 1999: 99.

JetBlue: Flying for Success, 5

that second tier carriers rush to increase their size and join the battle against the bigger players in the industry.

The U.S government’s recent policy change regarding mergers also supports the

view of merger advocates. In December, 2001, the Bush Administration promised to financially back the merger of weak carriers with strong ones. When questioned with the possibility of airfare increase, the Administrations responded that low-fare airliners, such as Southwest or Jetblue would discourage uncontrolled fare increase by their larger partners.

The other argument is that “Where and when competition exists, consumers

benefit. Where and when it does not, they suffer.”25 In short, competition benefits consumers. For instance, Air Canada quickly removed duplication of service after the merger between Air Canada and Canadian Airlines resulting in 20% fewer flights than the two separate airlines previously provided.26 As this example illustrates, the merger between major airlines would give too much market control to one player, and may cause customers to experience fare increases, reduced flights, or bad service.

September 11. One of the most influential socio-cultural factors affecting the

airline industry was the impact of the 9/11 terrorist attacks. Although the economy had already begun to turn down prior to 9/11, the attacks on both the World Trade Center and the Pentagon, pushed the economy more quickly and more deeply into recession. It also caused for people to doubt the safety of public air travel which led to a marked decrease in demand.

According to the Department of Transportation (DOT), there was a revenue drop

for the total industry of 38%. This was the worst recession the American airline industry had ever faced. This drop was due to two factors, an increase in operating costs coupled with a decrease in revenues. The increase in operating costs was the result of new security regulation from official directives, new cost of delays, and increases of labor costs as well as increase in insurance premiums.

In addition, demand dropped due to an increased fear of flying and heightened

security which deterred many potential passengers. The ability to be at a specific time across the country without delay or without standing in line for a long time at the airport was a critical need of airline customers which airlines were not capable of meeting.27 Yet, since 9/11, air traffic has greatly increased and continues to increase. Pre-9/11 passenger levels were predicted to return by 2003.28

25 Mark N. Cooper, “Freeing Public Policy from the Deregulation Debate,” Presented at American Bar Association 22

January 1999. 26 James Dune, “Air monopoly,” CBS news 10 October 2000. 27 Daniel Kasper, “The aftermath of 9/11: Implication for Airline Industry Structure & Competition,” MIT Boeing

Conference on Air Travel, 26 March 2002. 28 “Industry Survey,” Standard & Poors, (2002), March 28, 2002.

JetBlue: Flying for Success, 6

Weather. The weather is an unpredictable variable with a potential short-term effect on airline costs and operations.29 For instance, the weather is the second largest cause of airline accidents after pilot errors, and attributes more than 70% of delays. Air Transport Association (ATA) reported that the direct annual cost caused by diversion and cancellation amounts to $47 million and $222 million, respectively. In addition, the wind speed and temperature influence the fuel consumption of the aircraft while other weather conditions such as hurricane, ice and fog often entail flight cancellation.30

In addition to direct costs, there are indirect costs associated with unfavorable

weather and the resulting passenger complaints. Aviation is probably more sensitive to the weather than any other mode of transportation. Although the costs associated with the passenger complaints are not easily obtained, they are not insignificant considering possible loss in future revenue.

As a result, obtaining accurate weather forecast is a serious task for the airlines

not only for efficiency but also for passenger safety. Many carriers depend on government agencies such as the FAA, or pilot reports, for making weather forecasts.31

Economic Influence End of high-tech boom’s influence on air cargo business. Last year was the

worst year for air cargo business since the 1970s, recording a 7% decline worldwide, even lower than the 5% of sales loss during the Gulf War.32 Considering that 25% of airline revenue comes from cargo,33 the financial damage to the airline industry was significant.

Unlike passenger business, cargo business has not been substantially affected by

9/11. In fact, the real cause of the downturn in the air cargo business was the rapid decline of the information technology (IT) industry.” IT spending decreased at the end of 2000, and at the same time air cargo began to slide,” says Pascal Touin-Stratigeas, fleet forecast analyst for Airbus.

Because of the high cost of air cargo to user companies (around 1% of world

trade by volume and 40% by volume), the companies are adopting more cost efficient inventory strategies. For example, just-in-time manufacturing, of which emphasis is on minimum inventory and global sourcing of parts and components, is slowly replaced by other inventory systems which require less air shipments. Also, other companies are increasing the dependence on inland transportation such as trucks and trains.34

However, there are signs of recovery of the cargo business as the economy gets

better in Asia, the biggest revenue generator to the air cargo business. Cargo business

29 “Industry Survey,” Standard & Poors, (2002), March 28, 2002. 30 “Air Traffic Management in the Future Air Navigation System,” ATA (1994). 31 “Industry Survey,” Standard & Poors, (2002): 19. 32 Peter Conway, “Eastern sunrise,” Airline Business 1 November 2002: 46. 33 Peter Conway, “Eastern sunrise,” Airline Business 1 November 2002: 46. 34 “Cargo,” Airline Business 1 November 2001: 56.

JetBlue: Flying for Success, 7

sales volume has gone up over 10% in Hong Kong, the most important Asian hub, during the first quarter of 2002 and 24% in the second. Another notable factor is the rise of China whose economy is expected to boom following its joining to the World Trade Organization and the accelerating inward investment.35

Tightening corporate budget. Sales recovery of the airlines to the pre-1990 level

is not foreseeable. A decrease in business travel worsens the situation for the airlines. In an effort to exercise better cost control, corporations have restructured their traveling policies by downgrading corporate lodgings and limiting the use of first or business class air travel. According to the Business Travel Coalition’s 2002 U.S. Business Travel Survey, 60 percent of business travelers plan to further reduce expenditures on airline services during 2002.36 As a result, the number of business trips was down by 20 percent in 2001 compared to equivalent 2000 purchases according to C. Thomas Nulty, president of Navigant International.

In addition, business travelers’ indifference to business trip expenses is rapidly

disappearing. The 2002 U.S. Business Travel Survey has found that 57 percent of all purchased tickets were non-refundable, representing a 13 percent increase in the use of discounted tickets in a two-year period.37 The higher mix of leisure ticket sales decreases the yield, resulting in lower profit to the industry. Yield indicates the passenger revenue generated per revenue passenger-miles (RPMs). This increasing demand of low-fare tickets by business travelers is problematic to the airlines as the business travel accounts for about 34% of the domestic airline revenues. 38

Many observers agree that the business traveler will continue to choose either

low-fare or nonrefundable tickets even after the economy improves. They support the speculation with increasing complaints about unpleasant service in flight. Kevin Mitchell, chairman of the Business Travel Coalition (BTC), says “Only 45% of frequent business travelers perceive the value received from them as good or very good, compared with 80% for low-fare airlines.”39

Fuel Price. High cost and price fluctuation of fuel are the industries main

concerns. Fuel, which makes up about 15% of operation costs,40 is the second largest cost factor to the airlines. As the airline business has very small profit margins, between two and five percent in the best of times, the profit erosion due to oil price fluctuations strains the industry.41

35 Peter Conway, “Eastern sunrise,” Airline Business 1 November 2002: 46. 36 “Business Travel To Rise Over Next Six Months,” Airline Financial News 20.37 (2002). 37 “Business Travel To Rise Over Next Six Months,” Airline Financial News 20.37 (2002). 38 “Industry Survey,” Standard & Poors (2002): 3. 39 “Business Travel To Rise Over Next Six Months,” Airline Financial News 20.37 (2002). 40 Air Transport Association (2002). 41 http://www.airlines.org/public/news/display2.asp?nid=314, November 27, 2002.

JetBlue: Flying for Success, 8

Another growing concern is the unstable relationship between U.S. and Middle East. The prospective war with Iraq has already pushed oil prices up by 46.9% to 86.83 cents per gallon from January to October, 2002.42

Nevertheless, the impact of current fuel price increases are expected to be less

than in the past due to airlines responding by switching to fuel-efficient jets, fuel hedging and fuel surcharging.

To mitigate the oil shock, the airline companies began to replace old planes with

newer and more fuel-efficient jets. Also, they have shielded themselves by hedging fuel contracts through the future market. For example, Southwest hedged 100% of jet-fuel needs for the third and fourth quarters of 2001, locking the price of crude oil at $23. As oil prices rose to $30 a barrel, Southwest saved $43.1 million in the third quarter, reporting a 45% year-over-year net income growth in 2001.43 The airline industry is also known for compelling the passengers to shoulder their financial burdens by increasing airfare. “Although sometimes rescinded, the fuel surcharges have become relatively common in the airline industry.”44

Political Influence. Airlines are subject to extensive regulatory and legal requirements, both

domestically and internationally. These regulations involve significant compliance costs. In the last several years, the U.S. Congress has passed laws, and the Department of Transportation (DOT) and the Federal Aviation Administration (FAA) have issued regulations relating to the operation of airlines that have required significant expenditures.

Security. Since 9/11, many security measures have been implemented to

prevent further terrorist attacks, and insure public safety. However, the new security changes have negatively affected the airlines by increasing costs associated with heightened security and decreasing sales.

The government took initiative by signing the Aviation and Transportation

Security Act on November 19, 2001, and got hold of the security responsibility at the airport. Under the new Act, the airlines are required to be more involved in the security responsibilities by taking some additional costs such as equipment, federal charges, and airport charges.

These “mandated but un-reimbursed security costs,” have greatly impacted the

already financially struggling airline industry. For example, the newly imposed federal security tax, $2.50 per flight segment, has cost airlines $265 million.45 In addition, the Transportation Department has demanded the airliners to reinforce cockpit doors to protect the aircraft from any intrusions. The airlines were also forced to give up some 42 Russell Grantham, “Airline fear a fuel spike,” Atlanta Journal 18 September 2002. 43 Melanie Trottman, “Airline commodity prices hedging,” Wall Street Journal 16 January 2001: B. 4. 44 http://www2.state.id.us/dfm/ief/2000/apr00/Article0002.pdf, November 27, 2002. 45 http://www.bizjournals.com/pacific/stories/2002/10/07/daily32.html, November 27, 2002.

JetBlue: Flying for Success, 9

high-revenue seats in first-class to the marshal teams from the Federal Aviation Administration. Federal air marshals are plain-clothed, armed law enforcement officers who fly unannounced on domestic and international flights. Preventing the commercial carriers from carrying U.S. mail has also significantly reduced the revenue of the airline companies.46

In addition, the government has intensified the security procedures for

passengers and their luggage, resulting in the longer waiting time at the airport.47 Many turned-off passengers have responded by traveling less or finding alternative modes of transportation, such as car or train travel, in order to turn around the time-consuming and unpleasant security measure. This negative consumer reaction has driven sales revenue down in the airline industry. For example, the commuter affiliate of Alaska Airlines has lost 10% of ticket sales on its busiest route, the Seattle-Portland, Ore., shuttle. Also, in the northeast U.S., flying has been gradually replaced by the Acela Amtrak train in the New York-Washington-Boston shuttle market.48

Technological Influences Internet. “The airline industry is capital-, labor-, and technology intensive.”49 To

survive fierce price wars, which leave only a 3-4 percent profit margin even in the best time, the airline companies have aggressively employed cutting-edge technologies to optimize business procedures, reduce costs and improve customer service. The Internet has brought the most fundamental changes to the airlines.

Airlines first started using Internet for doing business50 in 1995, since then, to

pace with the increasing number of internet users, carriers have upgraded their home page to be more interactive. Today, travelers can not only view the flight schedules and their frequent-flyer accounts but can also make flight reservations. Jupiter Media Metrix predicts that online purchasing of travel products will reach $29 billion in 2003 up from $4 billion in 1999. Considering that the airline ticket sales represent 80% of all travel purchases, the growth of the online market is significant to the airlines.51

The Internet’s biggest appeal to the airline industry is the reduction of

distribution cost. “The Internet provides the lowest-cost form of distribution for airlines through both indirect and direct channels.”52 It has lowered the number of customer service agents, eliminated travel agent commissions and removed paper tickets. For example, the airlines paid about $3.0 billion for travel agent commission in 2001 down from 5.2 billion in 1999. In addition, issuing e-tickets has reduced the cost for the airlines, and improved the customer service. Now, passengers receive itinerary and receipt by fax or e-mail, or travel without tickets. “According to United Airlines,

46 John Crawley, “Proposal would life some air restriction,” Reuters 30 September 2002. 47 “Industry Survey,” Standard & Poors (2002): 3. 48 Chris Woodyard, “Security hassles deter many frequent fliers,” USA Today. 49 “Industry Survey,” Standard & Poors (2002):11. 50 “Industry Survey,” Standard & Poors (2002):11. 51 http://www.bcg.com/publications/files/airline_finance.pdf, November 27, 2002. 52 http://www.bcg.com/publications/files/airline_finance.pdf, November 27, 2002.

JetBlue: Flying for Success, 10

electronic ticketing costs just 50 cents per ticket, versus $8 for paper tickets, because it eliminates 14 accounting and processing procedure.” 53

However, trade-offs do exist for online booking. As “the rapid spread of Internet

technologies and the increasing customers’ access to information” has reduced the differentiation between the business and leisure fares, business travelers are increasingly choosing the leisure fares leaving the air ticket sales less profitable.54 Consequently, the average fares paid by business travelers fell by 2% in 2001 according to American Express Co.

Also, the Internet has made consumers more sensitive to prices. Customers make

their purchasing decision heavily depending on the price incentive. It makes it hard for airlines to build distinctive brand value, and develop customer loyalty.

INDUSTRY ANALYSIS In 1903, the Wright brothers’ first successful flight in Kitty Hawk, North Carolina

marked the beginning of the aviation industry. In 1927, Charles Lindbergh successfully completed a solo flight across the

Atlantic Ocean and created massive interest in flying with the general public. After this, a variety of air transport holding companies began, including Aviation Corporation. The air transport division of the company was called American Airways and later grew to become American Airlines. In 1928, what was to become another leading air transport company was created as a holding company by Boeing and its air transport division, United Aircraft and Transportation Corporation. In 1931 the four air transport divisions of United Aircraft became United Airlines. The Air Commerce Act, passed in 1926, allowed Federal regulation of air traffic rules.

The 1950s saw dramatic improvements in the capacity and comfort of

commercial flights. Planes were modernized, and jet service was introduced in 1959, enabling even faster cross-country service. The 1980s were marked by the deregulation of the industry, which resulted in the growth of smaller carriers and the mergers of larger carriers. The 1990s saw a dramatic increase in the number of passengers, including first time passengers, as prices were cut and the cities served by airlines increased.55

The Product. Transportation is the product offered by the airline industry.

Airlines derive their revenues from transporting passengers, carrying mail and cargo, and by selling in-flight services to passengers. Airlines also generate revenue through selling frequent flier credits to hotels, car rentals, credit cards, and other organizations that offer these credits as premiums or as a way to build good will.56 53 “Industry Survey,” Standard & Poors (2002): 11 54 Gabriele Piccoli, “Wyndham international: Fostering high-touch with high-tech,” Cornell University 10 October 2002: 3. 55 http://scriptorium.lib.duke.edu/adaccess/airline-history.html, November 20, 2002. 56 “Airlines, Industry Surveys,” Standard & Poors.

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The Department of Transportation (DOT) classifies airlines in the following

categories: • Major – annual revenues exceeding $ 1 billion, 130 – 450 seats per aircraft,

average length of travel 1000 – 5000 miles. • National – annual revenues between $ 100 million to $ 1 billion, 100 – 150 seats,

operating more of the short haul flights nationally. • Regional – annual revenues less than $ 100 million. Comprised of Commuter

airlines and Start-up carriers. • Charter – Unscheduled form of airline operation. Transport passengers on call. • Two-tier operators – These carriers are typically major airlines that service long-

haul markets via a hub-and-spoke system, but which also operate a fully independent, point to point air service, typically serving the discount excursion market. Channels of Distribution. The airline industry distributes tickets primarily

through travel agents (TA). TA’s generate 70% to 80% of total airline bookings. Airlines encourage TA’s to steer customers their way by offering “commission overrides”. TA’s use any of the major global distribution systems (GDS’s) to make reservations. These include Sabre, Amadeus, Galileo and Worldspan57.

Airlines also book flights directly through company clerks and via the Internet.

Although airlines supply their flight and fare information to GDS operators, most airlines reserve special rates for their own Internet websites. In June 2001, several larger U.S. airlines launched Orbitz, a travel related web site. Orbitz competes directly with TAs, since it allows customers to directly book their own flights on-line. Although airlines are still charged $2.50-$3.00 per booking made by the GDS operators, Orbitz enables airlines to eliminate TA commissions, of up to 5% per ticket, by distributing more tickets directly via the Internet. Internet sites are very interactive and allow passengers to check their flight status, book seats, and select specific seats on the aircraft.

In 2001, commissions cost the leading airlines approximately $3 billion. Jupiter

Communications of New York, a research firm, estimates 11% of tickets to be sold via the Internet in 2003 compared to 7% in 2001. Forester Research, a technology research firm in Cambridge, MA, estimates on-line travel bookings to reach $29 billion by 2003 compared to $14.2 billion in 200158.

Industry Evolution. Exhibit I presents the different steps of the product life cycle

of the airlines industry. Phase 4 is separated as it represents the actual North American Airline Industry compared to other international markets, such as Europe or Asia59. It highlights the 4 different stages of the airline industry’s evolution. The industry is

57 “Airlines, Industry Surveys,” Standard & Poors, March 28, 2002. 58 “Airlines, Industry Surveys,” Standard & Poors, March 28, 2002. 59 http://act250.tc.faa.gov/jup/jupq_011002/special_guest/wangerman/presentation.pdf, November 20, 2002.

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currently between phase 3 and phase 4. While the industry is just finishing consolidating and building new hubs and alliances, the redefinition of service and cost structure is being undertake. The new model is being developed by leading companies as well as new entrants that redefine the way of doing business. Jetblue is definitely at the edge of this strategy. The stability section of Phase 4 will only occur once there is full recovery from 9/11.

Airline Industry Growth. “A year ago, domestic airfares were down 19.2 percent

from the previous year. In October 2002, they remained relatively unchanged, but well below 2000 fares,” said Air Transport Association (ATA) Chief Economist David Swierenga. “Although passenger volumes appear to have rebounded, nothing could be further from the truth since domestic travel was down 20.1 percent in October 2001.”60

Exhibit II describes the evolution of the airline industry’s global revenue from

1978 to 2001. Despite the many challenges the airline industry has had to face, such as the Gulf War and the economic recession, as previously mentioned, the worst downfall the industry has ever known was a direct result of the events of 9/11, with a 35-40% revenue drop.

Porter’s 5 Forces for the Airline Industry. Porter’s Five Forces model is used below to evaluate the airline industry. The forces are competitive rivalry, bargaining power of customers, bargaining power of suppliers, threat of new entrants, and threat of substitute products. Understanding these forces helps in determining the intensity of competition that exists within the airline industry and understanding the profitability and attractiveness of the industry. The objective of the corporate strategy for any airline is always to strengthen its position in the industry by deciding how to influence particular characteristics of Porter’s Five Forces.61

Competitive Rivalry. The airline industry can be characterized as an imperfect

oligopoly, in which few carriers dominate in long-distance flights while several dozen smaller carriers compete for short distance flights. The competition is fierce and returns are generally low because of the cost of competition and buyers receiving benefits due to lower prices. Currently, airlines are trying to differentiate themselves through their frequent flyer programs. Frequent flyer programs are aimed to sway members to remain loyal to one airline despite the fact that other airlines might offer lower prices. Finding additional ways of differentiating their product remains critical to individual airline’s long-term successes.

To better manage the competitive rivalry, airlines began creating alliances with

each other. These alliances enable the airline in the same alliance to share customer information, schedules and distribution systems. Exhibit III highlights the four major alliances and their members. It is important to note that although alliances reduce 60 http://www.airlines.org/public/news/display2.asp?nid=6151, November 20, 2002. 61 http://www.fol.com/research/2000/features000309.htm, November 20, 2002.

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competitive rivalry between individual airlines, they do not deter rivalry between the allied groups themselves.

Bargaining Power of Customers. Bargaining power of airline customers tends

to be low because of several factors including, low concentration of buyers, the large number of buyers, no threat of any backward integration exists, little or no bargaining power for buyers on long distance flights. Air travel represents the only viable option in regards to long flights such as those between the U.S. and Europe. The quality of the service provided will possibly be only a small consideration to the buyer as this is only part of the consideration of the buyer and results in an even lower amount of bargaining power to the buyer

Bargaining Power of Suppliers. Suppliers are concentrated in the airline

industry, with most airlines being supplied by Boeing and/or Airbus. Because of this concentration it is difficult for airlines to exhibit much, if any, leverage over the supplier in an attempt to obtain lower prices. This is not to say that airlines have no choice. In fact, airlines may not believe that the products offered by alternative suppliers are differentiated and, therefore, are not obligated to purchase from just one supplier.

Airlines operate in an energy intensive industry. Prices and the availability of petroleum products are subject to political, economic and market factors outside the airline’s control. The moderate degree of power over suppliers further diminishes the ability to earn high profits and potentially reduces smaller airlines.

Threat of New Entrants. The threat of new entrants presents the possibility that

newer firms will enter the industry, increasing competition while diminishing existing airlines’ returns. The airline industry has seen the entrance and growth of low fare competitors (Air Tran Airways Inc., Southwest Airlines and Jet Blue). This entrance is despite the high barriers to entry including the difficulties associated with establishing a strong brand identity, obtaining a large amount of starting capital due to a high initial investment requirement, and obtaining the proper distribution channels (hubs) typical of the airline industry.

Once an airline has established a hub at an airport, several structural and

strategic factors combine to present high entry barriers to any other airlines that may try and enter spoke routes emanating from that hub. By providing more departures to more destinations, the hub carrier can attract a disproportionate share of the hub airport’s passengers. This happens for several reasons, including the preference of many travelers to use the carrier with the most flights in a city (so that the passenger can change departure times if travel plans change), marketing programs (such as frequent flyer programs) that create loyalty incentives for consumers to concentrate their travel on the dominant airline in their home city, and travel agent commission practices that create incentives for travel agents to encourage their customers to use the hub carrier. In addition, a hub carrier often enters into contracts with local businesses that provide incentives for the businesses to concentrate their travel on the hub carrier. All of these factors serve to discourage entry into a hub carrier’s spoke routes, especially by other carriers with similar cost structures.

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Threat of Substitute Products. There are several substitutes to air travel (e.g.

automobiles and trains), but over long distances and flying between continents, there are no real substitutes. The decision to use automobiles or trains is influenced by time, money, personal preference and convenience, but air travel offers a good price/value relationship and offers considerable speed advantages over other forms of travel.62

Costs. The greatest costs incurred by an airline are labor, fuel, and fleet costs. Fuel cost

has decreased since 1982, but as mentioned earlier, the cost for fuel is unpredictable and is based on a variety of factors both economic and political. 63

Deregulation. Before 1978, the airline industry operated under government

regulations, which prevented airlines from price collusion. Deregulation was introduced in 1978, and changed the U.S. airline industry dramatically. The end of federal regulations forced airlines to adopt a hub-and-spoke system of airports. Before this direct route system was permitted, airlines were forced to fly only between small markets as stipulated by the government.64 Although airlines were deregulated for the purpose of increasing airline revenues and creating more competition, many bankruptcies, large losses, and mergers, were caused by over-expansion and a fight for control of hub-airports.65

The goal of deregulation as to introduce competition into the marketplace so that

the industry could better meet the customers’ demands with efficiency, lower price and service.

For a time, regulation did benefit the airline industry. It provided the industry

with groundwork for future growth through the 1970s by guiding it to safe and orderly expansion, preventing competitive collusion, and ensuring high-quality service. However, deregulation was necessary due to the slowness of the existing regulatory system and the rapid pace of industry growth.66

One of the remarkable achievements of deregulation was the increased efficiency

of the industry. The deregulation of prices enabled the airlines to provide discounted tickets, and fill seats which would otherwise be empty. Since the deregulation, the number of airline passengers has more than doubled, and the seat occupancy has grown significantly.67

62 http://www.fol.com/research/2000/features000309.htm, November 20th, 2002. 63 http://www.airlines.org/public/industry/bin/Econ101.pdf, November 16th 2002. 64 http://www.howstuffworks.com/airline3.htm, 3 December 2002. 65 “Prospectus: JetBlue Airways Common Stock,” 11 April 2002. 66 Daniel Yergin, et al., “Fettered Flight: Globalization and the airline industry,” Global Decision Group 10 Oct. 2000:

3. 67 Carol B. Hallett, “Remarks on Global Competition in the Airline Industry,” Air Transport Association 30 March

1998.

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In addition, the ignited competition compelled the airlines to look for a better use of existing resources. Owing to hub-and-spoke system, the airlines could allocate different equipment where and how they wanted; for example, big jets were placed for long-haul routes and small jet propellers between the hub and spoke airports. 68

Deregulation is often thought of as the main cause of current air traffic

congestion and airport delays. It is also blamed for the deterioration of passenger service. The congestion and delay can be attributed to factors such as the pricing policy of local airports and air traffic control systems, which do not reflect the use and the value of expanding airport and airway capacity. Most airports charge landing fees primarily based on the weight of the aircraft or apply “the first-come, first-serve pricing policy”.69 This pricing policy discourages low value users such as small carriers or private aircrafts “to shift some of their activities to less congested airports and off-peak travel times.”70 It is also suggested that highly congested airports might properly add surcharges for landings at peak hours. 71

The increased price competition among the airliners has resulted in the

degradation of the service. Excessive price driven strategies after the deregulation have compelled the airliners to give up some of the frills such as extra leg room and some amenities in order to minimize the loss incurred from the decreased airfare.

The Global Airline Industry. The airline industry can consider being global

since many carriers operate internationally. The international carriers are affected by constraints which affect no other industry, and that often impede the formation of an international route system.

The Convention on International Civil Aviation recognizes a nation’s sovereignty

over its airspace and its right to stop foreign aircraft from entering that airspace. Internationally, scheduled commercial air traffic is made possible by Bilateral Agreements in which governments typically exchange air rights for the benefit of their respective carriers. There are three types of ‘traffic’ rights or ‘Freedoms’ which allow airlines to earn revenue internationally:

♦ Third Freedom: The right to carry revenue passengers, cargo or mail (traffic)

from your country to a point in the second country. ♦ Fourth Freedom: The right to carry passengers from a point in the second

country to your country. ♦ Fifth Freedom: The right to carry passengers between a point in a second

country and a point in a third country.

68 http://www.econlib.org/library/Enc/AirlineDeregulation.html, November 27, 2002. 69 John R. .Meyer and Thomas R. Menzis, “Airline Deregulation: Time to Complete the Job,” Issues in science and

technology online Winter 1999. 70 John R. .Meyer and Thomas R. Menzis, “Airline Deregulation: Time to Complete the Job,” Issues in science and

technology online Winter 1999. 71 http://www.econlib.org/library/Enc/AirlineDeregulation.html, November 27, 2002.

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♦ Sixth Freedom: The right to carry passengers from one country to another as long as a stop over is made in the airlines home country. The exchange of rights is done on a reciprocal basis. Therefore Third and Fourth

Freedom rights are easier to negotiate than Fifth Freedom, which clearly requires the consent of the third country.72

International Airlines. Airlines define global ‘presence’ in many ways, from

having a new aircraft in a foreign country, to having the airline’s ‘code’ appearing in GDS for increased bookings on a global level. Presence is highly sought after by airlines. Any arrangement that gives an airline a ‘presence’ in a foreign country, is preferable to one which does not. This want of ‘presence’, is the driving force behind most of the co- operative agreements that exist between international airlines today.

Future of the Global Airline Industry. Many analysts believe that the ‘global’ airline of tomorrow will be a

multinational mega- carrier. Ideally such a firm would consist of airlines based in different continents e.g. Europe, North America, Asia, etc. Continents that will provide strong feed to, and otherwise support a global route system. These multi-mega airlines would be much more than marketing alliances.

Virtually all analysts agree that such a carrier would have an enormous and

sustainable competitive advantage in today’s world. Presumably, its reduced operating costs and lower tax payments would result in both higher shareholder returns and lower air fares for consumers. Although the numerous benefits of such an arrangement are obvious, this type of ‘future’ will come very slowly, if it comes at all.

At present, its evolution is prevented by prohibitions against foreign control of

international airlines and concerns about what types of traffic rights such a carrier might inherit from its predecessors. These problems will remain as there are too many parties interested in the status quo.

Many countries do not look at airlines as commercial entities, but rather as an

extension of their foreign policy, proudly flying the ‘flag’ in many exotic destinations. Airlines are looked at as an essential part of the national transportation infrastructure and resist foreign control for reasons of national interest. Both the United States and Canada fall into this category.

It is only in very recent years that certain countries have truly put shares of their

national airlines “on the market.” Belgium did this in part by allowing British Airways and KLM to each take a 20% share in Sabena World Airlines, Argentina has essentially sold its national airline to the Spanish national airline and Australia, New Zealand and Jamaica are displaying a new openness on the question of international airlines.

72 http://www.airlines.org. November 21, 2002.

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Some countries are adopting new attitudes, but the countries which serve as

major transportation ‘hubs’ of Europe, North America and Asia are very slow to follow suit. Until they do, the truly ‘global’ airline can not exist.73

ORGANIZATIONAL ANALYSIS As a publicly traded company JetBlue’s ultimate goal is stockholder and

stakeholder satisfaction. JetBlue offers high quality air transportation at attractive prices to its customers.

Vision and Strategic Direction. With a total fleet of 132 airplanes and contracts

for the purchase of additional 100 aircrafts74, JetBlue wants to establish itself as the leading U.S. low-fare carrier, leaving competitors like Continental, AmericaWest and Southwest behind. JetBlue plans for steady growth of destinations and services which will enable it to keep customers as frequent fliers who can rely on JetBlue for their national travel plans. In addition to Costa Rica, JetBlue is currently developing an international set of destinations.

Since JetBlue’s first official flight on February 11, 2000, its primary goal has been

to grow enough to continue being successful, but to remain small enough in order to preserve its core values. Because the company is so young, there has been little change to its original strategic direction.

JetBlue Defined. “We are a low-fare, low-cost passenger airline that provides

high-quality customer service primarily on point-to-point routes. We offer our customers a differentiated product, with new aircraft, low fares, leather seats, free LiveTV (a direct 24-channel satellite TV service) at every seat, pre-assigned seating, and reliable performance.” 75

Principal Internal Stakeholders. Key Managers and their background.76

♦ David Neeleman, 41 years old, $335K Salary77, CEO and Director since 1998

Prior to founding JetBlue, Neeleman was co-founder of WestJet (1996-1998), served as CEO of reservation systems company Open Skies (1995-1998), Vice President and from 1988 President of Morris Air (1984-1994). He graduated from the University of Utah.

73 http://www.airlines.org, November 21, 2002. 74 http://investor.jetblue.com, November 4, 2002. 75 http://investor.jetblue.com, November 4, 2002. 76 http://www.jetblue.com, November 4, 2002. 77 http://biz.yahoo.com/t/75/4584.html, November 4, 2002.

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♦ David Barger, 43 years old, $335K Salary78, President, COO and Director since 1998. Barger worked for Continental Airlines, from 1992 until 1998, and for New York Air, from 1982 until 1988. He graduated from the University of Michigan.

♦ Thomas Kelly, 49 years old, $335K Salary79, Executive Vice President, General Counsel and Secretary since 1998. Kelly served, from 1995 until 1998, as Executive Vice President and member of the board of directors of Open Skies. From 1990 until 1994, he worked for Morris Air in the same position. He attended Harvard Law School.

♦ John Owen, 46 years old, $335K Salary,80 Executive Vice President and Chief Financial Officer

Owen served, from 1984 until 1998, as Treasurer for Southwest Airlines and holds a MBA from the University of Pennsylvania.

Managers’ Strengths and Weaknesses. The executive management team of

JetBlue consists of four major players who have been working consistently together since August 1998. Only CFO Owen joined them 5 months later. The fact that they have been working together for four years indicates a solid base for consistent performance and decision-making. Becoming the leading low-fare carrier in the country is driving their actions. It is interesting to note how the executives’ paths have crossed throughout their careers. Neeleman and Kelly, for example, previously worked together at Morris Air and Open Skies81. All four executives have extensive knowledge of the airline industry due to their prior work experience at various airlines such as Southwest, Continental or Morris Air.

The balance in JetBlue’s strategic leadership may be threatened by the attrition of

any of these top executives. If one of the executives were to leave and JetBlue were to face a serious challenge, the management team may not be able to successfully meet that challenge. Though, currently, most of their strategies, plans and goals have proven to be successful. This is evident in JetBlue’s successful advertising and marketing campaign which has helped to enhance JetBlue’s strong brand image.82

Ownership of JetBlue. JetBlue is publicly traded on the U.S. stock market (Nasdaq National Market

Symbol “jblu”83). On November 6, 2002, 5.866 million shares of common stock were offered where as 40.94 million stocks were estimated to be outstanding84. As of November 6, 2002, share price was $ 41, which would value JetBlue as of November 6, 2002 at $1,919 million. Both the executive committee members and board of directors

78 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 79 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 80 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 81 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 82 http://www.jetblue.com, November 4, 2002. 83 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 84 http://investor.jetblue.com, November 4, 2002.

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are the principal shareholders. Refer to the Board of Directors section for a brief discussion on a possible agency problem.

JetBlue has several main owners, some of them represented on the Board of

Directors. Sometime after JetBlue’s IPO in April 2002, the executive committee communicated that no dividend will be paid and that JetBlue’s profits would be reinvested in the growth of JetBlue85. This decision was met with no criticisms which can be indicative of the owners fully supporting this growth strategy chosen by management.

Board of Directors. JetBlue’s Board of Directors has 10 members86:

• Michael Lazarus, 46 years old, Chairman of the Board, holding 27,230 shares87 • David Checketts • Dr. Kim Clark holding 1,000 shares88 • Neal Moszkowski, also Board member at Integra Life Sciences and MediaLogic89 • Thomas Patterson, holding 27,230 shares90 • Joel Petersen, holding 189,592 shares91 • Frank Sica • Ann Rhoades, formerly Vice President of People for Southwest Airlines92 • David Neeleman, CEO of JetBlue • David Barger, President of JetBlue

The composition of the Board of Directors, including CEO and President, creates

a potential for conflicts of interest. Specifically, an “agency problem” may exist, since JetBlue’s top executives, who also serve on the Board, may be influenced by their personal interests for financial gains.

Operating Characteristics Size of Sales. JetBlue was able to post operating revenue in 2001 of $ 320.4

million after $104.6 in 2000. This means an increase of 306%. JetBlue posted a net income of $38.5 million in 2001 after a net loss of $ 21.3 million in 2000. Exhibit IV illustrates some interesting developments within JetBlue including significant increases in the number of passengers, seat availability, and departures—all factors contributing to increased sales. Refer to Financial Analysis section for more detail.

85 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 86 http://www.jetblue.com, November 20, 2002. 87 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 88 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 89 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 90 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 91 http://biz.yahoo.com/t/75/4584.html, November 4, 2002. 92 http://www.humanissues.org/conference/conference_2002.html, November 4, 2002.

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Size of Assets As of December 31, 2001, JetBlue owned 9 Airbus 320 and leased 21 Airbus 32093.

At that time it was serving 18 cities throughout the USA and San Juan, Costa Rica. JetBlue’s 2001 balance sheet shows Total Assets of $673.8 million compared to

$344.1 million in 2000. Exhibit V illustrates JetBlue’s development from March 31 to December 31, 2000 with regard to cities served, number of employees and operated aircrafts.

Hubs and Locations The John F. Kennedy Airport in New York is JetBlue’s main hub94. Long Beach,

California serves as the official West coast hub. Currently JetBlue has just one international destination, San Juan, Costa Rica. There are no further international expansion plans published at this time95.

Marketing Program Reaching the Customer. Within two years of operation, JetBlue was able to

establish a widely recognized brand name. As its brand name and logo indicate, JetBlue is focusing on the color blue, including web page design, airplanes, seats etc. As previously mentioned, JetBlue also established the customer loyalty program called “TrueBlue”. The reservation hotline telephone number 1 800 JETBLUE as well as the web page www.jetblue.com are easy memorable. JetBlue also offers a $5 discount for all on-line bookings. This has spurred an increase in the percentage of web-based bookings from 28.7% in 2000 to over 44% for 200196. The web page www.jetblue.com and reservation hotline provide combined 92.6% of their bookings97.

According to JetBlue, its marketing strategy is:

“to attract new customers by widely communicating [its] value proposition that low fares and quality air travel need not be mutually exclusive. [JetBlue] market[s] [its] services through advertising and promotions in newspapers, magazines, television and radio and through targeted public relations and promotional efforts.” [JetBlue] also relied on word-of-mouth to promote [its] brand.

[It] generally run[s] special promotions in coordination with the inauguration of service into new markets. Starting approximately five weeks before the launch of a new route, [JetBlue] undertake[s] a major advertising campaign in the target market and local media attention frequently focuses on the introduction of [its] low fares.”98

Employee Training and Benefits.

93 http://investor.jetblue.com, November 4, 2002. 94 http://www.jetblue.com, November 4, 2002. 95 http://www.jetblue.com, November 4, 2002. 96 http://investor.jetblue.com, November 4, 2002. 97 http://investor.jetblue.com, November 4, 2002. 98 http://www.jetblue.com, November 20, 2002.

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JetBlue currently employs over 2,300 full and part-time employees99. JetBlue established “JetBlue University” as its training facility for all employees. There are two branches to the University, the pilot training facility located in Miami, Florida, and the flight attendant training facility located in Kew Gardens, New York.100

Reservation agents are trained for four weeks in Salt Lake City, Utah, where the

reservation center is based.101 All newly hired pilots are required to receive an Airbus A320 type rating at the

Miami training facility, even if they have already done so in the past.102 In addition, all pilots are trained on Microsoft SharePoint Portal Server, which serves as a high-tech replacement for standard paper manuals once used by pilots to record required flight information.103

By law, all major airline flight attendants must be trained to ensure the safety of

its passengers.104 All JetBlue flight attendants are required to have a high school diploma and at least two years of “face-to-face” customer service experience. Once hired, after passing three interview sessions, all flight attendants must complete a 21- day training session, 10 days at the Miami Airbus training facility and 11 days in New York.105

In addition to JetBlue’s excellent training, JetBlue also provides its employees

with outstanding benefits making employment with the airline extremely attractive. JetBlue offers its pilots overtime pay, pay and a half, for any hours worked over the standard 70 hours per month. Although their base pay is significantly lower than the industry average, the overtime pay, rare for the airline industry, allows for a first-year captain to be “doing as well as the rest of the industry.”106 In addition to competitive wages, JetBlue also offers full benefits to its full-time employees, including medical, dental, vision, and disability, and offers a 401k, stock options, and profit sharing.107

JetBlue also offers job flexibility to both reservation agents and flight attendants.

500 of JetBlue’s 600 reservation agents work from home, and most of the agents work a shortened 25 hour workweek. According to Julie Strickland, JetBlue contact center analyst, “We are a corporation, but we don’t want to act as corporations traditionally do. If someone wants to work only 20 hours, they’ll be more productive than if we were pushing them to work 50 hours”108 JetBlue is using a workforce-management software to aid in its efforts of making this type of job flexibility work for both the 99 http://investor.jetblue.com, November 4, 2002. 100 http://www.jetblue.com/workhere, November 14, 2002. 101 http://www.hratworkco.com/July2002.htm, November 11, 2002. 102 http://www.aviationcareer.net/spotlight/cs_01252001_.cfm, November 11, 2002. 103 http://www.microsoft.com/servers/evaluation/casestudies/JetBlue.asp, November 13, 2002. 104 http://www.bls.gov/oco/ocos171.htm, November 14, 2002. 105 http://media.corporate-ir.net/media_files/NSD/jblu/reports/2001prospectus.pdf, November 13, 2002. 106 http://www.jetblue.com/workhere, November 14, 2002. 107 http://www.jetblue.com/workhere, November 14, 2002. 108 http://www.informationweek.com/story/IWK20020405S004, November 12, 2002.

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agents and the organization. This software helps the organization “manage and communicate with agents by phone, Web, E-mail, chat, handhelds, and fax.”109 It also allows agents to access all other agents work schedules so that they can swap shifts at their own discretion. 110

Flight attendants are also given a substantial amount of job flexibility through

the various job levels created by JetBlue. In addition to the traditional flight attendant, JetBlue offers special programs for college students and friends or family members. The JetBlue Inflight Crew program offers a college student an opportunity to work as a flight attendant for one year; this position is mostly offered to students who have chosen to take a year off from school. The job-sharing program is offered to two flight attendants, usually two friends or family members, who desire to share a work schedule. The candidates interview together and, upon hiring, are given a full work schedule; it is up to them to decide who works which shift.111

Significant Relationships. JetBlue maintains special relationships with some of its suppliers, such as Airbus,

and governmental agencies, such as the Federal Aviation Authority (FAA) and the Department of Transportation (DOT). Adhering to its cost savings strategy, JetBlue operates an aircraft fleet consisting of only one type of plane with one type of engine. The Airbus A320 was selected because of its “reliability, advanced technology and wide cabin space and the IAE International Aero Engines V2527-A5 engine for its reliability and fuel efficiency.”112 JetBlue relies on Airbus as its sole supplier of new aircraft and IAE for its aircraft engines. If, for any reason, either company were to cease its supply services, JetBlue would be forced to look to a new supplier that may not offer a product with the same type of advantages.

As for governmental agencies, JetBlue, like all other airlines, is subject to

regulatory and legal requirements, imposed by the FAA and the DOT, which usually have high costs associated with attaining full regulation compliance. Such laws include the Aviation Security Act, November 19, 2001, requiring airlines to implement specific security measures, which have proven to be quite costly due to increased staffing and flight delays. New laws and regulations can be imposed on JetBlue at any point in time and can “significantly increase the cost of airline operations or reduce the demand for air travel”.113

JetBlue Culture. JetBlue has certainly established a culture of its own which sets it apart from the

other major airlines. Stuart Klaskin of the aviation-consulting firm, Klaskin, Kushner & Co. boasts “[JetBlue is] a hip and cool place to work. They’re the first airline designed

109 http://www.informationweek.com/story/IWK20020405S004, November 12, 2002. 110 http://www.informationweek.com/story/IWK20020405S004, November 12, 2002. 111 http://www.aviationcareer.net/spotlight/cs_01252001_.cfm, November 13, 2002. 112 http://media.corporate-ir.net/media_files/NSD/jblu/reports/2001prospectus.pdf, November 8, 2002. 113 http://media.corporate-ir.net/media_files/NSD/jblu/reports/2001prospectus.pdf, November 8, 2002.

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for the dot-com generation.”114 The corporate culture introduced by CEO, David Neeleman, revolves around five core principles—safety, caring, integrity, fun, and passion. These core values are shared with prospective employees during interview rounds, and it is expected that all employees share and adhere to these values during their employment with JetBlue.115 As an employer, the company itself adheres to these values, as well. This is exemplified by JetBlue’s emphasis on its employees’ work-life balance—providing reservation agents the opportunity to work from home and flight attendants the option to share work schedules with a friend or family member. (See “Employee Training and Benefits” section for more details)

All employees, regardless of status, are referred to as “crewmembers”. In

addition, all newly hired employees must complete a two-day orientation, together, which reinforces the idea that each individual represents “a part of the whole”. Crewmembers are also given the opportunity to meet with top executives, including the CEO, on a monthly basis to discuss any pertinent issues or problems they are facing.116 The “open line of communication” philosophy is furthered by the TLC (tender loving care) program which involves top executives reviewing the company’s financial statements on a regular basis with crewmembers based out of cities other than New York, NY.117

Financial Data. Appendix I and II include JetBlue’s most recent income statement and balance

sheet, respectively. JetBlue made their initial public offering (IPO) on April 12, 2002. As such, the financial information only includes the first three quarters of 2002, and selective income related information obtained from the company’s prospectus for 2001. By comparing the total revenue and net income from operations balances (highlighted in light blue) as of December 31, 2001 to total revenue and net income from operations at September 30, 2002, one can see that JetBlue is doing remarkably well financially. That is, total revenue and net income for the first three quarters in 2002 have already exceeded revenues and income for the entire year of 2001 by approximately 40% and 3%, respectively. Financial analysts are confident that JetBlue’s financial success in the immediate future will continue.118

Sources of Competitive Advantage. JetBlue’s sources of competitive advantage are evident within the company itself

and are extended outward to its customers. They begin with the innovative work culture created by JetBlue, making its employees feel as if they are part of a big family. As mentioned earlier, top executives maintain open lines of communication with all “crewmembers” by conducting monthly face-to-face meetings in which employees can voice their concerns. In addition, JetBlue prides itself on the work schedule flexibility made available to its “crewmembers”. CEO David Neeleman contends that JetBlue 114 http://www.workindex.com/editorial/benefit/ben0208-03.asp, November 14, 2002. 115 http://www.aviationcareer.net/features/fa_06202001_01.cfm, November 13, 2002. 116 http://www.aviationnow.com/content/publication/awst/2002610/avi_stor.htm, November 13, 2002. 117 http://www.workindex.com/editorial/benefit/ben0208-03.asp, November 13, 2002. 118 http://biz.yahoo.com/p/j/jblu.html, November 19, 2002.

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gives a lot to its employees in terms of benefits, compensation, etc. but they expect their “employees to go above and beyond the call of duty when it comes to serving [its] customers.”119

Furthermore, JetBlue’s information technology is superior to that of its

competitors. They created the paperless cockpit, the first in its industry, which allows pilots to access all flight information and keep detailed flight records, electronically. The computerized cockpit puts less reliance on airline dispatchers, allowing for on-time arrivals and departures.

JetBlue has also implemented a queue program which immediately lets

passengers know, during check-in, which agent is available. This simple program has cut down average check-in times to less than one minute. Recently, JetBlue has also installed, in all of its aircraft, security cameras in the passenger cabin with monitors in the cockpit, as a security measure, so that flight crews are aware of what is happening in the cabin at all times. All of these technological innovations serve to make JetBlue’s service more efficient and secure and is valued highly by customers.120

JetBlue currently operates the youngest fleet in the industry. This is in line with the newly created company’s strategy to provide the best service available, including state of the art equipment and new planes.121 This is also a source of competitive advantage because, with a younger fleet, JetBlue is likely to experience less delays due to mechanical problems, keeping their customers happy.

Lastly, JetBlue’s low fares and free in-flight amenities are also a source of

competitive advantage. It offers flights to major city destinations at much lower fares, compared to their competitors. It is able to do so because of its non-union labor, a small airplane fleet, and operations out of secondary airports such as Rochester, NY or Long Beach, CA.122 In addition, each JetBlue airplane is equipped with all leather seats and free DirecTV programming with 24 channels at every seat, while most competitors usually charge passengers approximately $4.00 for the luxury of watching an in-flight movie from a few rows back. JetBlue also offers its customers additional discounts for booking their flight on-line123, and offers $50 vouchers or vouchers equal to the ticket price to each passenger whose flight has been delayed for two or four hours, respectively.124

Threat from the competition is inevitable. Larger airlines have already begun to

lower their fares. It is only a matter of time before the major competitors begin to make 119 http://www.aviationcareer.net/features/fa_06202001_01.cfm November 13, 2002. 120 http://www.cio.com/archive/070102/jetblue.html, November 19, 2002. 121 * The aircraft in this survey are limited to the large jet transports flown by that particular airline. Smaller aircraft flown by the carrier, and aircraft belonging to subsidiary airlines of that carrier, are excluded. The fleet sizes reflect an estimate of the number of aircraft in service at the time of this survey. http://www.airsafe.com/events/airlines/fleetage.htm, November 19th 2002. 122 http://www.time.com/time/columnist/donnelly/article/0,9565,167074,00.html, November 19, 2002. 123 http://www.jetblue.com, November 18, 2002. 124 http://www.aviationnow.com/content/publication/awst/2002610/avi_stor.htm, November 13, 2002.

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even more improvements to their business in attempts to increase their market share, in direct response to JetBlue’s successes. They may begin by improving their customer service and by offering customers similar in-flight perks, in addition to making scheduling and frequent-flier mile program improvements.125 However, JetBlue is anticipating these future challenges and plans to meet them by implementing new strategies to insure that “the JetBlue ‘experience’ isn’t diluted in any way”, so that customers keep coming back.126

CONCLUSION JetBlue is a young and thriving low-fare airline in an industry which has been

struggling due to the economic downturn and loss in consumer confidence. It has succeeded in differentiating itself from the competition by offering premium service at a discounted cost. Since its inception, JetBlue has been able to consistently increase its customer base and revenues by offering its services to more destinations.

In response to JetBlue’s successes, competing major airlines might adopt similar

low-cost strategies which could threaten JetBlue’s market share. These major airlines are more well-established in the industry offering more flexible flight schedules and direct flights to major cities. JetBlue could respond to this type of threat by seizing a growth opportunity to expand its customer-focused services in more domestic locations and neighboring countries, such as Canada and Mexico.

As JetBlue continues to make headway in the airline industry, CEO David

Neeleman contends that he has no desire to lead a major airline, acquire another company, or be acquired. Yet, JetBlue must realize that they are not without risk in the post 9/11 environment, where major airlines are intensely focused on implementing low cost strategies. The level of competition by major airlines is also not easily predictable for the foreseeable future.

“Jet Blue has been put together like no airline has ever been put

together before. It has the most capital. It has the best product. So now the question is, can you continue it? And that’s what worries me. That’s what keeps me up at night. How can we continue what we’ve started?”

—JetBlue CEO, David Neeleman, October 16, 2002, Interview with CBS 60 Minutes II

125 http://www.aviationnow.com/content/publication/awst/2002610/avi_stor.htm, November 13, 2002. 126 http://www.aviationnow.com/content/publication/awst/2002610/avi_stor.htm, November 13, 2002

JetBlue: Flying for Success, 26

Exhibit I Airline Industry Evolution

P h a se 1 : P h a s e 2 : P h a s e 3 : P h a s e 4

E a r ly D e r e g u la ti o n E v o lu t io n S ta b iliz a t io n N e w M o d e l

C a p a c ity G r o w L a r g e s c a le c o s t

re d u c tio n In d u str y

C o n s o lid a tio n S ta b ilit y

u n d e rm in e d

N e w E n tr a n t s R e s tru c t u re in o f

o p e r a tio n s f o r p e r f o rm a n c e

S tr u c t u r a lly s e c u r e p o si tio n s e m e rg e

( f o rt re s s h u b s )

N e w s e rv ic e u n b u n d in g (b y

c u s t o m e r s e g m e n t)

U n b u n d lin g o f S e rv ic e

S e r v ic e g ro w s i n im p o rta n c e

M a rk e t d is c ip lin e F u rth e r c o s t

st ru c tu re sp e c i a liz a tio n

P ric e s d ro p f a s te r th a n c o s ts

W e a k p la y e r s e x it B ro a d e n in g

c u st o m e r e x p e rie n c e

N e tw o rk f ra g m e n t a ti o n

F o c u s e d C o m p e tit o rs g r o w

E l e c t ro n ic m e d ia re d e f i n e s p a ra d ig m

h t tp :/ /a c t2 5 0 . tc . f a a . g o v /ju p /ju p q _ 0 1 1 0 0 2 /s p e c ia l_ g u e s t /w a n g e rm a n /p r e se n t a tio n .p d f F e d e ra l A v ia tio n A d m in ist ra tio n , E n g in e e r in g & In t e g r a ti o n S e r v i c e s

A irli n e In d u s tr y E v o lu tio n

JetBlue: Flying for Success, 27

Exhibit ll Seasonally Adjusted Quarterly Industry Revenue

JetBlue: Flying for Success, 28

Exhibit lII The Four Major Airline Alliances

SkyTeam AeroMexico AirFrance Delta Korean Air

Star Alliance Air Canada Air New Zealand All Nippon Airways Ansett Australia Austrian Airlines British Midland, Lauda Air, Lufthansa Mexicana Airlines, SAS Singapore Airlines Thai Airlines, Tyrolean Airways, United, Varig

Qualiflyer Swissair, Sabena, TAP Turkish Airlines, AOM Crossair, Air Littoral Air Europe, LOT PGA Volare

OneWorld Aer Lingus American Airlines British Airways Cathay Pacific Finnair Iberia LanChile Qantas

JetBlue: Flying for Success, 29

Exhibit IV JetBlue, Year Ended December 31, 2000 2001 Operating Statistics (unaudited): Revenue passengers ………………………… 1,144,421 3,116,817 Revenue passenger miles (000) ………………….. 1,004,496 3,281,835 Available seat miles (000) ………………………….. 1,371,836 4,208,267 Load factor 73.2% 78.0% Breakeven load factor 90.6% 73.7% Aircraft utilization (hours per day) ……………… 12.0 12.6 Average fare ……………………………………………. $88.84 $99.62 Yield per passenger mile (cents) 10.12 9.46 Passenger revenue per available seat mile (cents) … 7.41 7.38 Departures …………………………………………….. 10,265 26,334 Average stage length (miles) ………………………….. 825 986 Average number of operating aircraft during period ….. 5.8 14.7 Full-time equivalent employees at period end 1,028 2,116 Average fuel cost per gallon (cents) …………….. 96.15 75.63 Fuel gallons consumed (000) 18,340 55,095 Percent of sales through JetBlue.com during period … 28.7% 44.1% Source: JetBlue

JetBlue: Flying for Success, 30

Exhibit V JetBlue’s Development from March 31, 2000 to December 31, 2001

Cities Number of Full and Operating Aircraft At Quarter Ended Served Part-Time Employees Owned / Leased Total March 31, 2000 4 519 — / 3 3 June 30, 2000 5 665 1 / 4 5 September 30, 2000 9 993 4 / 4 8 December 31, 2000 12 1,174 4 / 6 10 March 31, 2001 12 1,599 4 / 7 11 June 30, 2001 15 1,764 4 / 10 14 September 30, 2001 17 2,078 6 / 12 18 December 31, 2001 18 2,361 9 / 12 21

Source: http://investor.jetblue.com, November 4, 2002.

JetBlue: Flying for Success, 31

APPENDIX I JetBlue balance sheet for the three quarters ended. Period Ending *** 30-Sep-02 30-Jun-02 31-Mar-02

Current Assets Cash And Cash Equivalents $207,758,000 $269,325,000 $92,536,000 Short Term Investments $12,540,000 $11,397,000 N/A Net Receivables $10,910,000 $16,795,000 $27,810,000 Inventory $4,684,000 $4,060,000 $3,168,000 Other Current Assets $10,936,000 $8,002,000 $9,365,000 Total Current Assets $246,828,000 $309,579,000 $132,879,000

Long Term Assets Long Term Investments N/A N/A N/A Property Plant And Equipment $858,905,000 $718,527,000 $627,706,000 Goodwill N/A N/A N/A Intangible Assets $64,475,000 N/A N/A Accumulated Amortization N/A N/A N/A Other Assets $32,300,000 $30,337,000 $25,521,000 Deferred Long Term Asset Charges N/A N/A N/A Total Assets $1,202,508,000 $1,058,443,000 $786,106,000

Current Liabilities Accounts Payable $168,696,000 $135,579,000 $118,199,000 Short Term And Current Long Term Debt $76,032,000 $75,850,000 $81,057,000 Other Current Liabilities N/A N/A N/A Total Current Liabilities $244,728,000 $211,429,000 $199,256,000 Long Term Debt $523,814,000 $437,203,000 $375,298,000 Other Liabilities N/A N/A N/A Deferred Long Term Liability Charges $41,844,000 $32,520,000 $19,875,000 Minority Interest N/A N/A N/A Negative Goodwill N/A N/A N/A Total Liabilities $810,386,000 $681,152,000 $594,429,000

Stock Holders Equity Misc Stocks Options Warrants N/A N/A N/A Redeemable Preferred Stock N/A N/A $215,450,000 Preferred Stock N/A N/A N/A Common Stock $421,000 $420,000 $44,000 Retained Earnings $629,000 ($11,526,000) ($25,168,000) Treasury Stock N/A N/A N/A Capital Surplus $401,245,000 $399,033,000 $12,450,000 Other Stockholder Equity ($10,173,000) ($10,636,000) ($11,099,000) Total Stockholder Equity $392,122,000 $377,291,000 ($23,773,000) Net Tangible Assets $327,647,000 $377,291,000 ($23,773,000) ***Note that IPO occurred on April 12, 2002

JetBlue: Flying for Success, 32

APPENDIX II JetBlue Income Statement–September 30, 2002 vs. December 31, 2001

Quarter Ending Year ended

Period Ending:*** 31-Mar-02 30-Jun-02 30-Sep-02 As of 9/30/02 12/31/2001 Difference Percentage

Total Revenue $133,369,000 $149,303,000 $165,261,000 $447,933,000 $320,414,000 $127,519,000 40%

Cost Of Revenue $65,975,000 $54,964,000 $43,128,000 $164,067,000

Gross Profit $67,394,000 $94,339,000 $122,133,000 $283,866,000

Operating Expenses

Research And Development N/A N/A N/A

Selling General And Administrative Expenses $39,304,000 $60,937,000 $92,746,000 $192,987,000 $293,607,000 ($100,620,000) -34%

Non Recurring N/A N/A N/A

Other Operating Expenses $4,712,000 $5,695,000 $6,926,000 $17,333,000 $63,483,000 ($46,150,000) -73%

Operating Income $23,378,000 $27,707,000 $22,461,000 $73,546,000 $26,807,000 $46,739,000 174%

Total Other Income And Expenses Net $3,099,000 ($680,000) $6,497,000 $8,916,000 $15,108,000 ($6,192,000) -41%

Earnings Before Interest And Taxes $26,477,000 $27,027,000 $28,958,000 $82,462,000 $41,915,000 $40,547,000 97%

Interest Expense $4,187,000 $1,993,000 $8,470,000 $14,650,000

Income Before Tax $22,290,000 $25,034,000 $20,488,000 $67,812,000

Income Tax Expense $9,286,000 $10,448,000 $8,333,000 $28,067,000

Equity Earnings Or Loss Unconsolidated Subsidiary N/A N/A N/A $0

Minority Interest N/A N/A N/A $0

Net Income From Continuing Operations $13,004,000 $14,586,000 $12,155,000 $39,745,000 $38,537,000 $1,208,000 3%

Nonrecurring Events

Discontinued Operations N/A N/A N/A

Extraordinary Items N/A N/A N/A

Effect Of Accounting Changes N/A N/A N/A

Other Items N/A N/A N/A

Net Income $13,004,000 $14,586,000 $12,155,000 $39,745,000 $38,537,000 $1,208,000 3%

Preferred Stock And Other Adjustments ($5,011,000) ($944,000) N/A ($5,955,000)

Net Income Applicable To Common Shares $7,993,000 $13,642,000 $12,155,000 $33,790,000

***Note that IPO occurred on April 12, 2002